Contentious Tax Quarterly Review – Summer 2025

In this Contentious Tax Review, we consider a number of important decisions relating to: (1) costs; (2) hardship; (3) late appeals and reasonable excuse; and (4) the reallocation of appeals. We also provide an update on three key changes to tribunal procedure.

This blog is based on an article written by Adam Craggs and Liam McKay that was published in Tax Journal on 11 July 2025.

Recent procedural decisions

There have been a number of recent procedural decisions that are worthy of note.

Costs 

In Advanced Hair Technology Ltd v HMRC [2025] UKFTT 599 (TC), the taxpayer applied for a costs order on the basis that HMRC had acted unreasonably in the course of conducting an appeal. The application was unusual in that it had been made at the invitation of the First-tier Tribunal (FTT) itself. The taxpayer had appealed against HMRC's decision that the majority of its supplies of hair transplant services were standard rated for VAT and not exempt supplies of medical care, and a penalty for failing to register for VAT at the correct time. 

The substantive appeal was heard by the FTT over four days, and HMRC was ultimately successful on the substantive issue. However, HMRC abandoned its pursuit of the penalty during the course of the hearing. On the first day of the hearing it became apparent, during cross-examination of the taxpayer's witness, that the taxpayer had received professional advice that its services were exempt from VAT, such that it had a reasonable excuse for its failure to register for VAT. Accordingly, on the second day of the hearing, the FTT asked HMRC to consider whether it still wished to pursue the penalty. HMRC's counsel was unable to obtain instructions, which required the FTT to reconvene on day four to hear evidence on the penalty appeal. However, and following the late arrival of HMRC's witness, HMRC confirmed that it would no longer pursue the penalty. The FTT was clearly irritated by HMRC's conduct and invited the taxpayer to consider whether it wished to make an application for costs incurred in consequence of the failure of HMRC to notify its intention to withdraw the penalty assessment until day four of the hearing. The taxpayer duly made an application for costs, arguing that it was unreasonable for HMRC to fail to provide instructions to its representatives to withdraw the penalty assessment until the late arrival of its witness at the hearing, immediately before he was due to give his evidence. 

Perhaps not surprisingly, the FTT granted the application. The FTT observed that once the cross-examination of the taxpayer's witness had concluded, it was very clear that the taxpayer had been neither careless nor negligent in its decision to treat its supplies as exempt, and that it had a reasonable excuse for its actions. Accordingly, the FTT found that, from the conclusion of the cross-examination, it was obvious that the taxpayer had a reasonable excuse and, while HMRC was entitled to a reasonable period of time after the conclusion of the cross-examination to consider whether to continue to pursue the penalty, after the expiry of that reasonable period, it was unreasonable for HMRC to continue to pursue the penalty assessment. The FTT determined that the reasonable period expired after the lunch adjournment on day three of the hearing, which allowed HMRC sufficient time to consider its position in light of the evidence.

Securing a costs award against HMRC remains a persistent challenge for taxpayers, with a high bar for establishing unreasonable conduct. The decision in Advanced Hair Technology highlights a particularly egregious example of such conduct which the FTT rightly criticised and penalised through a costs award in favour of the taxpayer. Whilst this was clearly the right outcome in this case, many practitioners will recognise the frustration of dealing with HMRC behaviour that, while falling short of the "unreasonable" threshold, still imposes unnecessary costs on taxpayers. 

Hardship

In Kearney Transport Ltd v HMRC [2025] UKFTT 593 (TC), the FTT considered whether the taxpayer’s appeal, which was in respect of excise duties, was entitled to proceed to a hearing without first paying the assessed duty on the grounds that to do so would cause the taxpayer hardship. The taxpayer had appealed an assessment of c.£70k and applied to HMRC for hardship. HMRC had requested extensive information to support the hardship application, including information relating to the taxpayer's financial position, following provision of its latest accounts, cash flow forecasts, bank account statements and information on debtors and creditors. In response, the taxpayer provided its accounts and explained that payment of the tax in advance of the appeal would mean that the potential for drawings to be taken from the business by the directors and shareholders would effectively be reduced by more than 50%, which would create a situation where the directors and shareholders would not be in position to meet their own personal living expenses and would impact the financial viability of the company. Following a request for further information from HMRC, the taxpayer advised that its financial status had been fully proven by its accounts and the other information provided to HMRC. HMRC refused the application for hardship, and the taxpayer appealed. 

In rejecting the taxpayer's application, the FTT noted that arguments about the level of profits available for distribution to shareholders was an argument about their hardship rather than the taxpayer's hardship. More importantly, and while accepting that the amount of disputed tax was significant, the FTT observed that the taxpayer's financial position was unclear given the only evidence it had been presented with was the company accounts and oral evidence from one of the company's directors. In that regard, the FTT observed that it may have had a better understanding of the position had the taxpayer's accountant given evidence. Accordingly, although the FTT accepted that there may well be hardship, the accounts and oral evidence did not, on a balance of probabilities, demonstrate that was the case.

As readers will be aware, taxpayers seeking to challenge HMRC decisions in respect of indirect taxes must pay the disputed tax before they can exercise their rights to appeal to the FTT - a requirement many view as inherently unfair. In today’s economic climate, such an up-front payment can be prohibitive. As a result, an increasing number of businesses are seeking to rely on 'hardship', which waives the payment requirement where it would cause serious financial difficulty to the business. However, pursuing hardship can be challenging as HMRC typically demands extensive financial evidence and the process can be both time-consuming and onerous. The decision in Kearney emphasises that: (1) the taxpayer bears the burden of proving hardship; and (2) meeting that burden typically demands a comprehensive and well-supported body of evidence, that goes beyond providing a minimal set of documents.

Late appeals and reasonable excuse

In Denise Howarth v HMRC [2025] UKFTT 499 (TC), the FTT considered an application by the taxpayer to bring a late appeal against penalties of £1,600 issued by HMRC for the late submission of her 2020/21 tax return. 

The taxpayer had been within self-assessment since 2004 and had filed her tax returns online for a number of years. The taxpayer's tax affairs were straightforward, and she had filed all of her previous tax returns on time. For the 2019/20 and 2020/21 tax years, the due dates for filing tax returns were effectively extended by 28 days due to the Covid-19 pandemic, and HMRC confirmed that no penalties would be charged for any return received by midnight on 28 February in the relevant year. 

HMRC’s computer records indicated that on 1 March 2021 the taxpayer opted-in to receive communications from HMRC electronically. The effect of this opt-in was that statutory notices would be sent by HMRC to the taxpayer’s electronic Personal Tax Account (PTA). When a notice was issued, HMRC would send the taxpayer a generic email advising her that a message was waiting on her PTA, which she could then access to view it. The FTT found that the taxpayer's opt-in was inadvertent and that the box for opting in was ticked (or not unticked) by the taxpayer in the course of the submission of her 2019/20 tax return and without her understanding the importance of her actions. She did not therefore consciously consent to it. 

It was common ground that the taxpayer and her husband sat down to complete their 2020/21 returns on 28 February 2022 and that, in the course of the evening, the taxpayer had filled in her return and accessed her computation showing that she had no tax to pay. HMRC’s computerised records showed that the taxpayer had reached the final stages of the submission process, but HMRC's case was that the taxpayer needed to take one further step to actually submit her return. Had she done so, the taxpayer would have received a 16-digit confirmation code. The taxpayer's position was that she had reached the end of the process as the screen gave no indication of there being a further step which needed to be carried out. Although she had received confirmation codes in earlier years, the taxpayer was not unduly surprised by the lack of a confirmation code as she had no reason to assume that the process would be identical to previous years. She had no tax to pay, and the images on her screen indicated to her that no further steps were required. As a precaution, the taxpayer took a screenshot to record what she believed to be confirmation that she had completed the process. The FTT accepted that the taxpayer reasonably believed that she had submitted her return on time and that her obligations in relation to her return were complete. However, the absence of a complete return on HMRC’s system led to a series of notifications being sent to the taxpayer’s PTA, each with a corresponding generic email to her email address. The first indication the taxpayer had that anything was amiss was a letter from HMRC's debt management team which was sent to her home address in March 2023, advising her that she owed £1,000. The taxpayer subsequently called HMRC, immediately submitted her return, and appealed the penalties that had been issued to her. The appeal was substantially out of time.

The FTT allowed the taxpayer's application to bring a late appeal and the substantive appeal itself. The FTT observed that the taxpayer's delay was serious and that she had, to some extent, been the author of her own misfortune by signing up to receive electronic communications from HMRC and then deleting genuine emails from HMRC that alerted her to check her PTA. However, the FTT also noted that, amongst other things, the taxpayer had conducted herself as someone who intended to comply with her tax obligations. Signing up to the electronic notification process was unintentional on her part and more likely to have been as a result of confusion in the course of the submission process and she reasonably believed that she had completed the process for submitting her return on time. In the circumstances, the FTT was satisfied that the taxpayer had a reasonable excuse for her failure. 

The FTT tends to adopt a strict approach to enforcing appeal deadlines and taxpayers face a high bar when seeking permission to appeal out of time. The decision in Howarth is therefore notable, not only because the taxpayer succeeded, but also because she succeeded in the face of what was a considerable delay.

Reallocation of appeals

Alexander Langsam v HMRC [2025] UKFTT 00404 (TC), concerned an application by the taxpayer for his appeal to be reallocated from a Basic to a Standard case. The taxpayer had appealed against an information notice issued by HMRC seeking information it asserted was reasonably necessary to check his tax position. The FTT allocated the appeal to the Basic category and advised the parties that it would be listed as a video hearing. The taxpayer applied for the appeal to be re-allocated as a Standard category case on the grounds that, because of complex legal issues (including matters of public law) and the need for “detailed and nuanced” witness evidence, it would be more appropriate for the case to be allocated to the Standard category. HMRC opposed the application on the basis the appeal was suitable for determination by way of a video hearing. 

In dismissing the application, the FTT noted that the allocation of an appeal against an information notice to the Basic category was consistent with Rule 23 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the FTT Rules) as well as the FTT's Practice Direction for the Allocation of Cases to Categories in the Tax Chamber. Accordingly, the FTT determined that it was not appropriate to allocate the appeal to a different category. In that regard, the FTT observed that there did not appear to be any material dispute of fact between the parties and the issues were clearly issues of law. As such, the FTT considered that a relatively short hearing would be sufficient to dispose of the appeal, and that a video hearing would be suitable. Accordingly, the FTT concluded that there was no reason to depart from the Practice Direction with regard to the category or format of the appeal.

The categorisation of cases plays a crucial role in enabling the FTT to allocate its resources efficiently, and ensuring that the level of judicial and administrative attention given to a case reflects the complexity of the issues in dispute. Although there are circumstances in which reallocation may be justified (judicial guidance on when a case should be categorised as Complex was provided by the FTT in Capital Air Services Ltd v HMRC [2010] UKFTT), the decision in Langsam illustrates the significant challenges taxpayers may face in seeking to have a case reclassified. 

Changes to Tribunal Procedure

Tribunal Procedure (Amendment) Rules 2025

The Tribunal Procedure (Amendment) Rules 2025, which came into force on 30 May 2025, introduce important changes to Rule 38 of the FTT Rules and Rule 43 of The Tribunal Procedure (Upper Tribunal) Rules 2008. Under the amended provisions, both the FTT and the Upper Tribunal now have the power to set aside a decision that disposes of proceedings on their own initiative. Previously, such decisions could only be set aside upon application by a party to the proceedings. Although not likely to be utilised on a regular basis, this is a practical and sensible amendment. 

Practice Statement on Alternative Dispute Resolution in Tax Disputes

The FTT has also published a new Practice Statement on Alternative Dispute Resolution (ADR). The purpose of the Practice Statement is to further the FTT's obligation, under Rule 3(1)(a) of the FTT Rules, to facilitate the use of ADR and provides general information on ADR and the process for applying to HMRC for ADR. The Practice Statement provides that the FTT will usually be willing to stay proceedings (for up to 150 days) in order to facilitate the use of ADR at any stage of the proceedings, including after HMRC has served its Statement of Case, or the parties have exchanged lists of documents, or witness statements. Where parties wish to use ADR, after a hearing date has been set, the FTT will only be willing to stay proceedings if satisfied that the hearing will be able to go ahead on the date set if ADR does not resolve the dispute. Importantly, the Practice Statement notes that an unreasonable failure to consider, or enter into, ADR may, in appropriate cases, result in costs being awarded against a party, or in a party recovering a lower proportion of their costs. Where an appeal has been allocated to the Complex category and is within the costs regime, the costs of ADR may be recoverable.

Updated Guidance on Taking Oral Evidence from Abroad

The FTT has also updated its guidance on the procedure to be followed when a party wishes to rely on oral evidence of a person (including the party themselves) given by video or telephone from a country other than the UK. The guidance provides that, subject to limited exceptions, oral evidence may only be taken from witnesses (including litigants in person presenting their own cases) who are physically in the UK to give that evidence. Where a party wishes to rely on live oral evidence by video from abroad, the person seeking to rely on that evidence will, in all cases, need permission from the FTT, and the guidance sets out the process for seeking such permission.

The growing complexity of tax appeals, especially those involving large corporates and high-net-worth individuals, means that evidence from individuals outside the UK, including expert witnesses, is increasingly common. Taxpayers should review the new guidance carefully, identify early on whether overseas evidence will be needed and make any necessary application to the FTT as soon as possible to facilitate its use.